The San Diego chip maker said late Friday that it would not re-nominate Jacobs, the son of Qualcomm co-founder Irwin Jacobs, after he notified Qualcomm that he might attempt to buy the company.
Shares of Qualcomm gained 0.8% to $61.28 after hours on Friday, but were trading down 0.5% early Monday. The Financial Times reported earlier that Jacobs had approached investors including Masayoshi Son's Softbank Corp (SFTBY .
While the bid would take Qualcomm out of the public markets and remove the possibility of another hostile bid, the San Diego company is not an ideal candidate for a leveraged buyout.
For starters, Jacobs' group would have to include a big equity check, Moody's Investors Service analyst Richard Lane said. The equity portion of the acquisition would fall between $20 billion to $30 billion, he suggested.
While Son and Softbank, which controls the Vision Fund, have tremendous resources, a sale involving a Japanese backer would trigger a review by the Committee on Foreign Investment in the U.S. (Cfius). A leveraged buyout would concern the group, based on Cfius's previous comments on Broadcom's proposed acquisition of Qualcomm.
"Cfius has said it was concerned that Qualcomm may be run in a private equity-style under Broadcom -- an LBO scenario would be very similar," Lane said.
Broadcom's last bid for Qualcomm valued the company at $82 per share, or $143 billion to $149 billion, including estimated debt from Qualcomm's planned purchase of NXP Semiconductors NV (NXPI - Get Report) .
Jacobs stepped down as Qualcomm's executive chairman on March 9, with former Cardinal Health Inc. (CAH - Get Report) , Eli Lilly and Co. (LLY - Get Report) and General Motors Co. (GM - Get Report) executive Jeffrey Henderson replacing him as non-executive chairman. Qualcomm said the move reflected its commitment to improving corporate governance, ahead of a showdown at its annual meeting with Broadcom.
Eli Lilly is an Action Alerts Plus holding.
Since Qualcomm and Jacobs had argued that the $82 per share bid materially undervalued the company, RBC Capital Markets Amit Daryanani suggested in a report that the offer would likely have to be $90 or higher. That would put the enterprise valuation, including debt, at more than $160 billion and likely require more than $30 billion in equity, RBC projects.
At about $90 per share, the investors could generate a 20% to 30% internal rate of return, Daryanani calculated, if Qualcomm hits operational targets and the sponsors could exit at a valuation of around 12 times Ebitda. However, the analyst wrote that the valuation, Cfius's concerns and the potential disruption to Qualcomm's negotiations with Action Alerts Plus holding Apple Inc. (AAPL - Get Report) and Huawei Technologies Co. Ltd. make an LBO unlikely.
Likewise, Angelo Zino of CFRA Research gave Jacobs long-shot odds. "Given the sheer size, needed investors and Paul Jacobs's less than 1% stake in [Qualcomm], we see a successful takeout as unrealistic and unlikely," he wrote.
Qualcomm's debt levels have already prompted Moody's and Standard & Poor's to raise red flags. The ratings agencies each placed a negative outlook on Qualcomm in February after the company raised its NXP Semiconductors NV to $127.50 cash per share from $110.00.
Representatives of Qualcomm and Broadcom could not immediately be reached Friday.
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